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12/10/14

The following was part of the intro to IKN291 last Sunday. It includes a mail from a friend that's the best thing I've ever read on the 43-101 system. If you don't read my blather that's understandable, but I hope you read the mail received.

Aurcana (AUN.v) last week announced a new 43-101 resource for its La Negra mine and (of course) I couldn’t resist pointing out the glaringly bizarre nature of what was being put forward as a logical and understandable development byAUN.v in a blog post (2). Here’sthe table from that post...

...which should be enough for this intro today. That post resulted in a lot of very interesting feedback from several separate sources, including a three-cornered discussion between myself and two regular mailpals, both sector professionals (and for what it’s worth a couple of the best brains in the business for my money...but then again I’m going to say that because they’re both going to read these words J) which morphed into the whole concept of the 43-101 reports and whether they were worth anything these days. What happened, in rough terms was that

1) I put forward the case that these days the 43-101 report system was a waste of time, it needed to be scrapped and that one of these fine days the Candian Institute of Mining, Metallurgy and Petroleum (CIM) who oversee it are going to find themselves in legal trouble from some lawsuit or other, which will be the end of it for sure.

2) One of my two mailpals disagreed with this position. He took the stance that the CIM 43-101 system isn’t there to “protect the investor”, it’s there to lay out information required by the regulations and to make sure a set of protocols (normally geological) are adhered to. His point was that it’s never been designed for investment decisions or the retail (or even insto) community, it’s a hard-nosed geol thing and as geology is not an exact science, conclusions are and will always be open to interpretations. His position is that people put too much confidence in 43-101 and that’s not CIMs fault; in fact CIM makes sure the caveats to the 43-101 system are there and written in every report.

3) This is of course well-worn territory and it wasn’t really the point I was trying to make. My point is that 43-101 only came to exist because of Bre-X and was created out of the mess and rubble left by that debacle because the world had lost its faith in the mining and exploration business. No trust = no money so the mining sector, led by the Canadian geology people (along with Australia and its JORC rules that came roughly in parallel) had the task of re-gaining the trust of the world. The answer was 43-101 and it was invented as a form of protection. And hey it worked, because with these official documents in hand (technical reports, resource reports, PEAs, Pre-Feas, Feas) the mining industry could once again attract capital to its business. But it only worked for a while, because we’re now in a situation where the system has been co-opted by the scumbags of the mining world, the Lenic Rodriguez’s of Aurcana, who take a rulebook that was created to protect and use it as a weapon in order to scam people out of their money.This is why I specifically used the word "worthless" in my post to describe 43-101; we can play the pass-the-parcel blame and point to the problems of the system and blame the other set of people until the cows come home. It's been done several times before but it doesn't change the basic problem, that of the CIM system as stands being worthless.

4) This two-sided debate continued for a while longer and it didn’t reveal anything particularly new, but it was noticeable that the third member of the triangle wasn’t joining in. Then all at once the following mail arrived from the third corner and blew us both away. I’ve asked for and been given permission to reproduce it here (as long as a couple of very small edits happen in order to protect IDs). This is the best thing I’ve ever read on the subject of 43-101, I hope you get a kick out of it too.

So much fun… but I beg you both to go back to the beginning. There was a time that miners and mining were a conservative lot; mining executives were generally grey haired types who understood the risks and made cautious, long-term investments and paid reliable dividends to shareholders. Back then, companies prepared what are now considered non-compliant resource and reserve estimates using paper, pencils and perhaps more importantly people’s brains and experience valued.

Then along came a revolution in computers, spreadsheets, speed, capital markets, bankers and a new game was invented. The barrier to entry was so low and potential rewards so high that our casino called mining attracted all matter of humanity, replete with many motivated entirely by greed alone. A modern day Klondike if you will. It wasn’t until the now infamous Bre-X crime was perpetrated that 43-101 legislation was drafted and approved. The process was originally only meant to provide more documented evidence of the integrity of data, sampling and assaying (which few people read and even fewer understand) along with the assumptions that are used in estimating resources and reserves.

Now, some dozen years out, the odds on the game remain stacked heavily in favor of the issuer and against the lowly common shareholder. Consider the process where the issuer hires and pays the consultant to provide a product to his liking and will subsequently reward that contractor with yet more work. Where, within this system, is there any inherent need to ensure integrity. The 43-101 legislation conferred that responsibility on a new class of professional – the P.Geo, complete with a full disciplinary and punitive process which requires that professionals call one another to account. But no, it has never occurred. Even where the most blatant examples of misuse we find scant evidence of any sort of fine, punishment or consequence for the production of an inferior product.

Yours truly duly sat the exams, earned the P.Geo designation was awarded a qualified persons official stamp and soon afterward realized the folly of the club, its members and the entire process. In time I abandoned the club altogether as it served no useful purpose. Over the ensuing period I’ve been witness to more sophisticated forms of 43-101 trickery, which in your author’s experience, is the natural evolution of graft and corruption the world over. To wit, our modern western world is as corrupt a place as you can find but it is now veiled in such a manner as to appear legitimate and of no consequence to the commoner (retail investor).

Meanwhile, back to the matter at hand, documents of all types must be looked on with skepticism and disbelief. Financial statements still provide the best measure of the health of a business, but footnotes need to be read with care. Reserves and resources, whether 43-101 or not, need to be examined wherever we can, however it is my view that it comes down to our awareness of the quality of those people managing and governing the business that best differentiates the best from the worst.

It’s a privilege to see that kind of thing turn up in one’s mailbox, quite brilliant.

In the last dozen years, the rules of 43-101 have been turned on their head and offer no sort of protection to anyone, because they can be used for good by good people and for bad by bad people. Any system that allows Aurcana to state that it has 115m ounces of silver in a specific bunch of rocks, then just two years afterwards say that there’s just 10% of that number in the same rocks under the same classification, then suffer no sort of penalty or sanction afterwards, is the epitome of dysfunctional. It is, in a single word, worthless.

What isn’t worthless is good people doing good honest work, that hasn’t changed, but the label at the top of reports that says “43- 101” no longer means anything. We’re back to the pre-Bre-X days when diligent work by peer-respected individuals counted for everything and when slipshod work could be thrown into the same piles and promoted as legitimate by scamsters, hucksters and purveyors of dreams. The main problem with 43-101 today is that it still has a sense of gravitas, it’s still considered a solid and reliable benchmark not just by us retail grunts at the bottom of the food chain, but by fund managers, brokerages, geologists, engineers, CEOs, merchant bankers and even the third party compilers who make their money from supplying the work that goes into the reports.

The CIM 43-101 system is broken, the Aurcana case proves that without a shadow of a doubt. And as with all broken items, they’re either fixed, replaced or totally ignored.

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